Why Hamilton—Not Jefferson—Is the Father of the American Economy

tags: Economy, Jefferson, Hamilton

Stephen S. Cohen and J. Bradford DeLong are the authors of "Concrete Economics: The Hamilton Approach to Economic Growth and Policy" (Harvard Business Review Press, 2016).

... Alexander Hamilton has only a single statue honoring him, in front of the building that now houses his Treasury Department. And the current secretary of the Treasury wants to remove Hamilton’s portrait—and his stern vigilance—from the $10 bill.

Yet the United States we have today is not Jefferson’s, but Hamilton’s. Why? Because once the Hamiltonian system was set, it stuck. It worked. And so, very quickly it became too strong and too useful to too many powerful groups for any political coalition to dismantle it.

Hamilton’s system was constructed of four drivers that reinforced one another, not just economically but politically: high tariffs; high spending on infrastructure; assumption of the states’ debts by the federal government; and a central bank.

The economy was to be reshaped to promote industry. And the principal instrument for this was a high tariff on manufactured imports from Britain, the traditional world-dominant manufacturer.

The tariff would provide the incentive to invest in the development of manufacturing technologies and would subsidize the nascent manufacturing firms that would make those investments.

It was also to be the major source of federal government revenues, and would thus support an extensive program of infrastructure development. This was vital for territorial expansion and economic development, and for adding the critical political support of the western farmers to the northern coastal commercial and labor interests.

But that was not all. The tariff was also the instrument that permitted the federal government to credibly assume states’ debts incurred to fund the Revolutionary War, thus strengthening the central government (central to Hamilton’s plans).

The creation of a federal government debt also constituted the basis of a new and vigorous financial market. No wonder then that in Hamilton’s strong and settled opinion: “a national debt, if it is not excessive, will be to us a national blessing.”

Finally there was Bank of the United States, which Hamilton designed to sit at the center of the financial system and tame the wildcat banks and their wildcat currencies.

As the Hamiltonian system developed, tariffs rose to about 35% of the values of manufactured imports by 1816. And the tariff stayed up: it was among very highest in the North Atlantic for more than a century. These benefits were massive. They were also massively unexpected. Hamilton believed that a focus on manufacturing, technology, secondary-product exports, corporate organization, banks, and finance was a very good bet. But he and his allies had no idea how good a bet it would be. Nobody did.

The Hamiltonian system flourished, and slowly transformed itself first into the American System of manufacturers and then into mass production and Fordism proper. It set the pattern for all subsequent redesigns of the American economy. And that has since spread over an ever-increasing proportion of the globe.

What was needed, and what the United States got at the right time, was Alexander Hamilton. ...

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